Market downturns can be a prelude to profitability if you have the funds to take advantage of it. During a market downturn, real estate becomes more affordable. However, just like other assets, commercial real estate (CRE) investors need to find that sweet spot to get in just as the property values start to rise.
The issue is that residential and commercial real estate values are impacted differently. Merely watching the residential market won’t clue you into the best time to buy a property. But if that won’t, what will? Below, 15 members of Forbes Real Estate Council provide techniques they use to determine the viability of CRE properties and figure out the best time to make a buy.
1. Stick To What You Know
The best time to buy is always now. Timing markets is a tricky proposition. Savvy investors with good fundamentals and strong constitution should find opportunity in any market condition. Stick to what you know best by identifying an asset, talking to industry experts and evaluating the upside. CRE investors with a clear entrance and exit strategy will start racking up wins while others wait. – Josh Gopan, Simone Development Companies
2. Buy When You Afford To
The best time to buy a property is when you can afford to. There’s no need to wait for a down market where you try and get a “steal.” If you can afford to buy, then buy. If you cannot afford to buy, then don’t. A down market for one is not a down market for others. – Jammie Jelks, Legacy Home Loans
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3. Don’t Use Short-Term Financing
It’s about understanding where interest rates are, knowing where we are in long- and short-term debt cycles and being stringent in underwriting. Also, how you stress-test your projects is key. You must run thorough scenarios to be sure that if something happens unexpectedly, the existing cash flows can weather the storm. Where many go wrong is using short-term financing as downturns can drag on. – Kellie Rastegar, Rastegar Property Company
4. Work With A Local Expert
Unlike much of the U.S. in this pandemic and post-pandemic market, our residential market here in our fly-in only destination market is indeed in a downturn—a buyer’s market. Both residential and commercial investors simply need to work with a local expert well versed in the current market’s cycle who can guide them toward the best ROI vehicle for their specific investment parameters. – Gregory Gunter, Berkshire Hathaway HomeServices Colonial Homes San Miguel
5. Partner With A CRE Professional
Economic downturns affect real estate sectors in different ways. It is essential to partner with a CRE professional that has extensive knowledge not only on the real estate of a specific area but also in the actual commercial sectors and their economic patterns. Analyzing the data and leveraging the knowledge of the CRE professional is the best bet on purchasing at the best time. – Marco Del Zotto, LIV | Sotheby’s International Realty – Breckenridge, CO
6. Pay Attention To The Market
CRE varies by type and by market/submarket. At the moment, industrial is hot due to the direct-to-consumer shift in buying and the demand for regional warehouses of goods. Regional malls are declining as people shop more online. Just pay attention to what the market is doing. Migration patterns (urban to suburban currently) will create demand in areas or increase vacancy in others. – Ken McElroy, MC Companies
7. Evaluate The End Use
Evaluate the end use. For example, warehouse space to support home deliveries would be more desirable than a retail shopping mall right now. Think about how the next few years will allow investment assets to be used and what risks are posed with it in comparison to what opportunities it creates or facilitates. – Blake Plumley, BluWater Capital LLC
8. Focus On Flexibility And Reuse
In every market downtown, one or more of the commercial sectors loses its luster. Office and retail are obvious losers this time around. If investors can find those properties at fire-sale pricing with the flexibility for them to be repurposed to life science, biotech, assembly or last-mile logistics, it may be a home run. Flexibility and reuse are key in commercial properties. – Kristin Geenty, The Geenty Group, Realtors
9. Look For Consistent City Growth
A good indicator to buy is a consistent growth in the city with limited area to build. When cities are constantly growing, there is oftentimes a home shortage. It’s always good to find properties that can be rezoned to higher density uses. These properties are usually located on busy roads. This makes them less desirable, so you can pick them up for a deal. – Chris Ryan, Beyond Properties Group (eXp Realty)
10. Look At Demographics And Economy
One of the best ways to determine the best time to buy is looking at the demographics and local economy of the area and making a hypothesis. Look at similar properties and ask yourself, is the market growing or shrinking? Are people in the area employed or struggling to find employment? These few questions will help predict the longer term prospects for the property location. – Nathaniel Kunes, AppFolio Inc.
11. Look For Immediate Upside Potential
Buy smart. The greatest value and return on an investment property is realized at the acquisition. You must look for assets with immediate upside potential or equity. This could be through rehabbing, leasing up, adding square footage or even repurposing a property based on better utilization of the zoning rights. – Kofi Nartey, SOCIETY Real Estate + Development
12. Explore Digital Marketplaces
Investing has never been easier or more secure now that there are many investment opportunities available on 24/7 digital CRE marketplaces. The recent financial transformation of the CRE industry through blockchain technology enables investors to easily buy and sell properties just as if they were blue chip stocks packaged as security token offerings (STOs). Explore CRE digital marketplaces! – Garratt Hasenstab, The Mountain Life Companies™
13. Check The Price Against Historical Data
Check the price per square foot relative to the current and historical market data for that area. We have done well by focusing on properties with value-add potential that are on the low end of or below the average price in a particular area. On the other hand, if your investment strategy is focused on cap rate, timing doesn’t matter as much as you’re underwriting cash flow more than the real estate. – Catherine Kuo, Elite Homes | Christie’s International Real Estate
14. Focus On Cap Rates And Profitability
Many successful CRE investors focus more on cap rates and long-term profitability than on “timing” their purchase in order to buy a property at the absolute bottom of the market. In today’s market, look for properties in the early stages of default in market sectors that are showing signs of recovery or where demographic trends point toward a rapid post-pandemic rebound. – Rick Sharga, RealtyTrac
15. Wait Until CRE Values Stabilize
If your goal is to build equity via appreciation over time, then buying in a down market is the way to do it. However, the current pandemic has seen residential real estate prices soar, while CRE values are beginning to plummet in many locations. Wait until CRE values have stabilized before buying. Real estate bottoms can last months or years, so if you are paying attention, you won’t miss it. – Noah Grayson, South End Capital Corporation